Location pay is neither new nor revolutionary. Think of the more familiar London allowance for working in the capital. Sensible organisations respond to recruitment hot spots or problem areas with temporary payments. What is more challenging for the public sector is trying to introduce a whole system of varying base pay across the country.

The first challenge is deciding what the basis of the calculation on local differences is: is it cost of living or the labour market situation? Surely, it has to be the latter as it is the employment situation that affects recruitment and retention. But people talk loosely about the higher costs that require higher pay. That may apply to the commuter fares getting into London, but fuel and food costs may be higher in Cornwall than in Surrey.

Secondly, how to define the appropriate geographical unit? Regional pay has been suggested, but pay levels can vary as much within regions as between them. Eastern England has Cambridge and Stevenage, Norwich and Great Yarmouth within it – places with very different labour markets.

Next, how do we manage boundaries between geographic areas? This is already a problem for the London peripheries, but this would potentially be multiplied several times over. The reason is that areas that are easy to commute and administrative boundaries are simply not the same. People in Huddersfield may work in Manchester or Leeds, just as much as in their home town.

Irrespective of geography, occupation is another key factor that location pay ignores. Some occupations operate on a global basis (and not just bankers – think of top class academics) others on a national or regional basis (eg doctors), while other employees look for work only in their town or even on a sub-city basis where employment close to home is vital to fit in with domestic responsibilities and the level of wages does not allow for commuting. A number of employment groups will be in short supply even now, for example specialist social workers. Others less so. A simple location system uplifts or constrains remuneration irrespective of these important occupational variations.

Finally, there is the matter of control; can we be certain that the system will not be abused? The data upon which any pay system will be based are not always so clear: the broad direction of differences across the country may be obvious but not the precise detail. Research by IDS shows that private sector companies tend to keep location pay on a tight rein: they fear its inflationary effects as the case for higher pay is made either through management weakness, exploited by better informed trade unions, or by lazy management responding to recruitment and retention difficulties by throwing money at the problem. We have already seen in the public sector that certain occupational groups have driven up their pay on the back of a shortage in one location, leading to an additional payment that spreads elsewhere. This sort of pattern could be replicated but with higher pay applying to the whole workforce not just one group.

Some of these challenges can be dealt with through good system design, but politicians should always be aware of the law of unintended consequences. Location pay may be another case of letting a genie out of the bottle; be it the technical problems described above or the impact on local incomes – which is another issue entirely.